Estate planning by a married couple should be a positive and harmonious experience. After all, the goals of the parties are usually the same — to assure when one of the marriage partners passes away, that the estate will be protected and conserved for the survivor, and when both parties are gone the remaining estate will pass on to the children or other beneficiaries in the most efficient manner. When the parties have children together and neither has a child from a prior marriage, it is usually a simple matter to establish an estate plan that will accomplish the family’s goals of reducing estate tax, avoiding probate and assuring that the estate will be protected during the parents’ lifetimes and for future generations. However, if the family includes one or more children from a prior marriage, a well conceived estate plan can become more complicated.
When clients with prior marriage children come to the attorney’s office they have usually resolved how the estate will some day be divided. Based on which party brought most of the assets to the marriage, the length of the marriage, which children are considered most deserving and a multitude of other factors, they have usually reached a decision as to whether the estate will ultimately pass equally to his children and her children, mostly to his children, mostly to hers, or some other arrangement. The problem, however, is how to assure their plan will be carried out without unduly restricting or controlling the surviving spouse during his or her remaining lifetime.
Take the case where the husband and wife each have two children from prior marriages and, for whatever reasons, they have decided that 2/3 of the estate should ultimately pass to his children and 1/3 should ultimately pass to her children. In that situation we often hear the husband express their goals like this: “If I die first, I want my wife well taken care of, without any restrictions or controls. I want her to have whatever she needs and to be in control of her finances. However, when she is also gone, we want the remaining estate to be divided between our children 2/3–1/3.” The problem which then arises is how to assure predictability of the outcome without unduly restricting the surviving spouse.
In the above example, assume the husband passes away first and all assets are left to the wife with the understanding that she will leave those assets in the agreed 2/3–1/3 shares when she passes away. Assume the wife lives ten years beyond her husband and during that time she has considerable contact with her own children, but very little contact with her husband’s children. Human nature being what it is, it would not be unrealistic to expect that she might begin to justify a larger share passing to her children. She may feel they are more deserving or have a greater need than her deceased husband’s children. Also, if the surviving wife in our example were to remarry how would that factor into the first husband’s children receiving their 2/3 share? If one spouse survives the other for a considerable time even the most honest and well intentioned surviving spouse may be tempted to alter the agreed upon estate plan to the detriment of the deceased spouse’s children. The point is, if there are no restrictions or limitations placed on the surviving spouse, then the ultimate outcome of the estate plan is not predictable.
As an alternative, assume upon the death of the husband, that all assets are left in trust for the wife with a bank or other third party as the trustee, and with a provision that requires the 2/3–1/3 distribution to children upon the wife’s death. Here, we have much more predictability as to the outcome, but, of course, the surviving spouse is not completely free of restrictions or limitations.
Some of the techniques to add predictability include the use of a bank or other third party as trustee, limitations on access to principal, a requirement that the survivor deplete his or her own assets before withdrawing trust assets, or an estate contract whereby the parties agree not to amend their estate plan after the first spouse is deceased. There are a number of other strategies that also may be useful in particular circumstances.
In the case of families with prior marriage children, the overriding issue is how to balance the conflicting goals of predictability on the one hand and freedom from restrictions and limitations on the other. There are a number of tools that can be used to add predictability to the estate plan, but they will by necessity add some measure of restriction or limitation. How successful the estate plan will be depends on understanding which of those tools are appropriate in a given case.
Estate planning for a family with prior marriage children must be undertaken carefully and must include an open and frank discussion of the realities of the situation. Then, an estate plan can be established that will best meet the family’s needs and assure their goals are met.